Whether you're a first-time buyer looking for the perfect starter house or a seasoned pro trading up to your waterfront dream home, you are probably asking the same questions: Can I afford this? And is this the right move at the right time?
To get a more accurate picture of what you can afford to borrow, you should analyze three things: you and your co-borrower's income, your budget and your savings.
- Do you have job security?
- Do you work in a commission-based job? Are you confident that your commission structure and monthly income are stable?
- Do you expect your and your co-borrower’s income to increase or at least stay the same?
- Are you expecting or planning to have a child in the near future? Do you know if your salaries and budget will change once the baby is born? Will one of you be staying at home to take care of the baby (which may reduce your monthly take home salary)?
It's very important to know not only how much you earn but how much you spend per month. Even with low mortgage rates, a mortgage payment and the additional monthly expenses that go along with owning a home could break your budget.
You should outline how much you currently spend on the following categories: auto and transportation, bills and utilities, education, entertainment, food and dining, gifts and donations, health and fitness, home, kids, personal care, pets, shopping, taxes, travel and other miscellaneous monthly expenses. How much do you have left over to put toward a mortgage?
A typical rule of thumb is you should not put more than 36 percent of your income toward debts (mortgage payments, car payments and credit card payments), 31 percent toward taxes and then have 33 percent for everything else (including savings or investments). Of course you will probably have to consider other factors such as the average cost of living in your area, median house prices and your immediate need for more or different housing space.
You will likely need a significant down payment in order to buy a new house (mostly likely 3.5 percent or more; 20 percent down is the most common). Do you think you will have enough money for the necessary down payment, closing costs, plus the new monthly mortgage payment? Will you have enough money either in your savings or your monthly budget to buy discretionary items? Do you have enough money in savings in case of an emergency such as an injury or a broken water heater?
It is important to not completely raid your savings when you buy a new house. It is always advised to expect the unexpected with homeownership. In general, you should budget 1 to 3 percent of your budget on house repairs and maintenance.
To easily determine how much house you can afford, use our home affordability calculator.
Once you've determined how much you can afford, start shopping for real-time mortgage rates here.